Neuroeconomics combines neuroscience, economics, and psychology to study how we make choices. It looks at the role of the brain when we evaluate decisions, categorize risks and rewards, and interact with each other.

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Neuroeconomics & neuroscience

Neuroscience studies the nervous system, with broad areas such as the senses, movement, and internal regulation. Neuroeconomics is the subset that focuses on high-level concepts of personal choices and decisions, and how these are represented using our neurons and biochemistry.

Neuroeconomics & economics

Economics studies choices and decisions, with broad areas such as macroeconomics for large groups and microeconomics for individuals. Neuroeconomics is the subset that focuses on personal choices and the mental changes that correlate with the choices and may even cause them. A key insight is that the biological substance of a living organism can be modeled as implementing an optimizing solution to some survival/reproductive challenge in the evolutionary environment.

Neuroeconomics findings tend to confirm that emotions are an important factor in many economic choices.

Experiments

In a typical behavioral economics experiment, a subject is asked to make a series of economic decisions. For example, a subject may be asked whether they prefer to have 45 cents or a gamble with a 50% chance of one dollar and 50% chance of nothing. The experimenter will then measure different variables in order to determine what is going on in the subject's mind as they make the decision. The simplest experiments record the subject's decision over various different design parameters (what about 42 cents?), and use the data to generate formal models that predict performance. This is the type of experiment for which Daniel Kahneman won the Nobel Prize in Economics.

Neuroeconomics extends the approach of behavioral economics by adding observation of the nervous system to the set of explanatory variables.

In neuroeconomic experiments, full brain scans will be performed using fMRI or PET in order to compare the roles of the different brain areas that contribute to economic decision-making. Other experiments measure ERP (event-related potentials, which are closely related to EEG), and MEG (magnetoencephalograms) to measure the timecourses of different brain events that contribute to economic decision making.

Criticisms

Gul and Pesendorfer (2005) have argued that the methodology of neuroeconomics answers irrelevant questions, in that it concentrates on what provides the most hedonic satisfaction to experimental subjects rather than what economic outcome those subjects choose out of multiple options. However, neuroeconomic research has been able to provide more insight into some behavior that could not be adequately explained by other methods.

Ramifications

Neuroeconomics, although a relatively recent approach to biology and human behavior, shows promise of contributing to knowledge in a wide range of areas. Neuroeconomic approaches have already been applied to issues as diverse as proving guilt beyond a reasonable doubt [1] and analyzing communications services demand [2].

Some consider that neuroeconomics could be a new source of manipulative tools for advertisers to influence buying decisions, and that consumers should be taught to identify them.